In a similar fashion to the eurozone measures released earlier this morning, the UK flash PMIs for November exceeded expectations.
The composite measure printed at 48.3, up from October’s reading of 48.2 and above expectations of 47.5. This was driven by an unchanged rate of decline in both services and manufacturing sectors, which printed flat at 48.8 and 46.2 respectively.
Despite the positive surprises in the data, signs of a faster slowdown in UK economic conditions ahead were littered across the overall report. For example, volumes of new work decreased for the fourth month in a row and the rate of decline accelerated to its fastest since January 2021. Additionally, input cost pressures remained elevated, however, firms were struggling to pass this onto the consumer due to weaker demand outlooks and competitive price pressures.
Although the latter will come as a positive development for the BoE as it highlights how weaker demand is now promoting disinflation, signs of more aggressive margin compression don’t bode well for the growth outlook over the coming year and will likely result in a more acute unwinding in employment.
In the manufacturing sector, which has arguably been leading this economic cycle due to its earlier reopening post-Covid, employment levels are already starting to fall as business activity dries up. Manufacturing employment recorded the steepest downturn since October 2020, with firms citing the non-replacement of voluntary leavers due to shortages of new work to replace completed orders. While sub-indices for the services sector suggest conditions aren’t as damning, rising cost-of-living pressures are likely to accelerate the downturn in new orders and the difficulties faced by firms in hiring as employees demand higher remunerations to protect against elevated inflation. With employment accounting for one of the main input costs for service sector firms, further margin compression, which is already visible in manufacturing firms, looks set to occur.
Overall, today’s PMIs reinforce that the UK economy is already in recession.
This has also been confirmed by the OBR and Bank of England. However, the depth of the contraction as suggested by the PMIs for November is stark; data thus far suggests that the contraction in Q4 is the steepest since the height of the financial crisis when excluding pandemic months. Additionally, forward-looking indicators suggest that the pace of the contraction is only set to accelerate in the early quarters of 2023. Today’s PMIs thus paint a fairly bleak investment outlook for UK assets. Since the BoE’s recession warnings in September, however, this has largely been accounted for in FX markets, which look to be trading on the improved global risk conditions over the past 36 hours and the slight beat in the PMI data relative to expectations.
Simon Harvey, Head of FX Analysis